IEA: Estimate of decline in non-OPEC output for 2016 is cut by 12%

Crude prices rose to their highest in three months in early March, stoked by tightening supply, proposed new producer talks on co-ordinated output action and US dollar weakness. At the time of writing, Brent was at $39.80/bbl and US WTI was at $37.30/bbl.

Sharp decelerations in demand growth – particularly in the US and China – pulled global growth down to a one-year low of 1.2 mb/d in 4Q15, compared to the year earlier, dramatically below the near five-year high of 2.3 mb/d in 3Q15. A gain of around 1.2 mb/d is forecast for 2016.

Global oil supplies eased by 180 kb/d in February, to 96.5 mb/d, on lower OPEC and non-OPEC output. Production stood 1.8 mb/d above a year earlier, as a slight decline in non-OPEC was more than offset by OPEC gains. Non-OPEC production is estimated to fall by 750 kb/d, to 57.0 mb/d in 2016, 100 kb/d less than in last month’s Report.

OPEC crude oil production eased by 90 kb/d in February to a still-robust 32.61 mb/d with losses from Iraq, Nigeria and the UAE partly offset by a substantial rise in flows from post-sanctions Iran. Saudi Arabia, OPEC’s largest producer, held supplies steady.

OECD commercial inventories gained 20.2 mb in January while forward demand cover remained comfortable at 32.7 days. Preliminary data suggest that in February, OECD inventories drew for the first time in a year while volumes of crude held in floating storage increased.
Global refinery throughputs are estimated at 79.1 mb/d in 1Q16, reflecting weak OECD refinery throughput and a shift of peak spring maintenance to 1Q. Annual growth in 4Q15 fell to below 1 mb/d in 4Q15 amid product stock builds and in line with a slowdown in global oil demand growth.

Light At The End Of The Tunnel?

International crude oil prices have recovered remarkably in recent weeks. From a nadir of $28.5/bbl in mid-January Brent crude is now trading around $40/bbl. This should not, however, be taken as a definitive sign that the worst is necessarily over. Even so, there are signs that prices might have bottomed out.

The factors cited in this report that currently support higher prices include: possible action by oil producers to control output; supply outages in Iraq, Nigeria and the UAE; signs that non-OPEC supply is falling; no reduction in our forecast of oil demand growth; and recent weakness of the US dollar.

Later this month some oil producers are expected to meet to discuss a possible output freeze. We cannot know what this might be and in any event it is rather unlikely that an agreement will affect the supply/demand balance substantially in the first half of 2016. Before any production freeze or cut is agreed, we have seen supply disruptions in Iraq, Nigeria and UAE. Production from these countries fell in February by 350 kb/d. Meanwhile, Iran’s return to the market has been less dramatic than the Iranians said it would be; in February we believe that production increased by 220 kb/d and, provisionally, it appears that Iran’s return will be gradual.

The focus is on non-OPEC countries to see if high-cost output is falling. There are already signs that this is happening: in the US, we expect production this year to fall by 530 kb/d, and we have downgraded our 2016 outlook for Brazil, Colombia and others. For the non-OPEC countries we now expect production to fall by 750 kb/d: our view last month was that this number would be 600 kb/d. Of course, there is no guarantee that this trend will continue, but there are clear signs that market forces – ahead of any production restraint initiative – are working their magic and higher cost producers are cutting output.

We have warned in earlier Reports that the risks to global oil demand growth are almost certainly on the downside. For now, we have left unchanged at 1.2 mb/d our estimate for growth in 2016. Many reports claim that strong demand for US gasoline is a factor behind recent price bullishness but they overlook weakness in other products e.g. middle distillates. Our view is that total demand in the world’s biggest market will be flat in 2016, but if prices maintain their recent upward momentum there could be further weakness. In the world’s second biggest demand market, China, we maintain our view that growth this year will be only 330 kb/d, well below the ten-year average growth rate of 440 kb/d. We expect India and other smaller non-OECD Asian economies and the Middle East to provide most of the 2016 growth. The foundations for global demand growth are sound, but not rock-solid.

The impact of the changing value of the US dollar on oil markets is thought by some to be a major driving force in the recent price recovery. Where this factor leads us in the next few months depends on how well commodity-dependent economies and net oil-importing economies have adjusted to lower prices; whether commodities prices have truly bottomed out as some believe; and on changes to interest rates.

We have looked at stocks data for both the OECD – where commercial stocks levels increased in January to yet another record high – and non-OECD. It is clear that China has added significant volumes to both commercial and strategic stocks during 2015 culminating in an apparent build of 1.4 mb/d in December. We have also re-analysed our data for floating storage and oil in transit and further reduced the uncertainty in the supply/demand balance that is described as “missing barrels”. The figure usually described as such is now 0.8 mb/d, well within the normal range considering the vagaries of oil data.

In this report we present an essentially unchanged picture for the overall oil supply/demand balances. For the first half of 2016, the implied surplus of supply over demand remains high at 1.9 mb/d in 1Q and 1.5 mb/d in 2Q. To the extent the oil price is forward-looking, comfort will be taken from our view that in the second half of 2016 the gap between supply and demand narrows significantly to 0.2 mb/d in both 3Q and 4Q.

For prices there may be light at the end of what has been a long, dark tunnel, but we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance. It is clear that the current direction of travel is the correct one, although with a long way to go. Without an increase in demand expectations high cost oil suppliers will continue to bear the brunt of the market-clearing process.